POINT OF TAXATION IN SERVICE TAX- PART-I

[Dr. Sanjiv Agarwal]

For the first time since  the introduction of service tax in India, the Government has notified the Point of Taxation Rules, 2011 vide Notification No. 18/2011-ST dated 1.3.2011 which have been made effective  from April, 1, 2011. These rules determine the point in time when the services shall be deemed to be provided.

Background

The Government had issued the draft of Point of Taxation Rules in 2010. There draft rules were called ‘Draft Point of Taxation (For Services Provided or Received inIndia) Rules, 2010’ for comments issued under the power conferred by section 94 (z) (hhh) of the Finance Act, 1994 (as amended). The objective was to systemize and harmonise the rules in relation to point of taxation services. Prior to  these rules, basis of taxation was based on –

a)  taxable services provided or to be provided [section 65 (105)] 

b) Charge of service tax on the taxable services (section 66)

c) Payment of service tax within the specified period from the end of quarter or month, as the case may be, in which the payment is received (Rule 6)

d) Payment of service tax on advance received (section 67)

According to the preamble to draft Point of Taxation Rules, following objective and need was highlighted to have Point of Taxation Rules in place-

“The Government of India proposes to issue Point of Taxation (for Services Provided or Received in India) Rules, 2010 in exercise of the powers conferred on it under section 94(2)(hhh) of the Finance Act, 1994.

The purpose of these rules is to introduce clarity and certainty in the matter of levy and collection of Service Tax particularly in situations of change of rate of service tax or imposition of service tax on new services. At present, there is lack of clarity as to the date from which the changed rate or a new levy of service tax become payable and taxpayers as well as tax officials face uncertainty in this regard as the provisions are not explicit. Similar uncertainty prevails in regard to cases of continuous supply of services. So far these issues have been addressed by CBEC through clarificatory circulars that accompany such changes. A need has been felt to put the regulatory framework on a transparent, clear and durable basis and hence these rules.

The other major change proposed to be brought about through these rules is to link the payment of tax to provision of service, raising of the invoice or payment for service provided or to be provided, whichever is the earliest. Currently the payment of service tax is linked to receipt of payment for the service, which is at odds with regime in force in Central Excise and V A T laws implemented by the States. In both Central Excise and VAT, tax payment is required on accrual basis - upon manufacture and clearance of goods in the former and issue of invoice in the latter. In neither case is the tax payment linked actual receipt of payment for the goods. The GST regime is likely to follow this practice and it is necessary to align the service tax regime with it so that transition to GST will be smooth. The change in the point of payment of tax will also simplify accounting for the taxpayers.

The proposed changes are broadly on lines of best international practices.”

There have been disputes between the revenue authorities and the service providers as to the taxable event and the rate of service tax applicable. Tribunals have held that rate of service tax applicable for levy of service tax shall be the rate of service tax  prevailing on the date of providing/receiving of service and not on the date of invoice or payment, taxable event being rendering of a taxable service.

In other indirect taxes such as excise duty or value added tax (VAT), tax is collected at the time of clearance of goods or sale of goods but service tax is  collected on  receipt of payment so much so that ‘no collection, no service tax’ rule prevailed. Presently, service tax is administered by the provisions contained in the Finance Act, 1994  which have been amended by subsequent Finance Acts in last 18 years. Service Tax Rules, 1994 provide the manner of keeping records, prescribes the person liable, procedure and manner for registration, payment, return, appeal etc. Rule 6 of the said rules govern the payment   of service tax on collection basis which has never been amended since 1994.

The need for Point of Taxation Rules was also felt because in cenvat credit system , assessee avails cenvat credit immediately  on payment of tax on inputs or input services where as payment of tax on output services gets deferred till the invoice amount is actually collected, thus creating revenue mismatch. Also, delay in payment of tax on output services also helps the assessee in a little bit of fund management. Service tax has grown manifold over last 18 years and in view of its contribution to economy and tax revenue, Government deemed it proper to introduce Point of Taxation rules to harmonise tax practices, bring in efficiency and move a step forward towards introduction of goods and service tax in near future.

Point of Taxation Rules 2011 (POT Rules)

Point of Taxation Rules 2011, as notified by Notification No 18/2011-ST dated 1.3.2011 are applicable w.e.f. 1 April 2011 . These rules determine the point in time when the services shall be deemed to be provided. The general rule will be that the time of provision of service will be the earliest of the following dates:

(i) Date on which service is provided or to be provided

(ii.) Date of invoice

(iii.) Date of payment

Consequential changes have also been made in the Service Tax Rules, 1994 to alter the payment of service tax from receipt of payment to provision of service and also to permit adjustment of tax when service is not finally provided.

Amendment in Service Tax Rules due to Point of Taxation Rules

So far as Service Tax Rules, 1994 are concerned, a number of changes have been made in the Service Tax Rules to align the provisions consequent to the introduction of Point of Taxation Rules, 2011. A new rule has been introduced to provide that the applicable rate of tax shall be the rate prevailing at the time when the services are deemed to have been provided.

With Point of Taxation Rules, and amendment in Service Tax Rules 1994, the focus has shifted from collection of payment of service tax to deemed provision of services. In order to give effect to this provision, the Government has framed “Point of Taxation Rules, 2011” vide notification 18/2011 w.e.f. 1^st April 2011 according to which Rate of Service Tax shall be the rate at the time when services are deemed to have been provided. “Point of Taxation at which Services are deemed to have been provided” is now crucial because it is that rate of Service Tax prevailing at that point in time when a service shall be deemed to have been provided.

Point of Taxation Rules, 2011

Point of Taxation Rules 2011 are applicable w.e.f 1.4.2011 and contain following rules. (For text, refer to Appendix 17 of the Book) :

1. Short title & commencement – known as the Point of Taxation Rules, 2011 and to come into force w.e.f. 1. April 2011.

2. Definitions of associated enterprises, continuous supply of service, invoice, point of taxation and taxable services.

3. Determination of point of taxation

4. Determination of point of taxation in case of change of rate of tax in case where taxable service is provided before charge rate and in case of taxable service provided after change of rate.

5. Payment of tax in case of new services

6. Determination of point of taxation in case of continuous supply of services.

7. Determination of point of taxation in case of associated enterprises

8. Determination of point of taxation incase of copy rights, trademarks, designs or patents (IPRs)

9. Savings - Point of Taxation Rules not to apply to invoices issued prior to 1.4.2011. 

Gist of Point of Taxation Rules

Situation/ in case of	Concerned Rule	First happening	Subsequent happening	What will be Point of Taxation
Existing Service without change in rate of tax	3	Services Provided or to be provided	Issue of Invoice & Receipt of Payment	Date of provision of service
		Issue of Invoice	Service Provided & Receipt of Payment	Date of issue of Invoice
		Receipt of Payment	Service Provided & Issue of Invoice	Date of receipt of Advance
Import of Service under section 66A	Exp. 2 to rule 3			Date of payment or issue of Invoice, whichever is earlier
Services provided prior to date of change of rate	4(a) (i)	Issue of Invoice & Receipt of Payment		Date of payment or issue of Invoice whichever is earlier
	4(a) (ii)	Invoice raised prior to change of rate	Amount received subsequent to change of rate	Date of issue of invoice
	4(a) (iii)	Amount received prior to change of rate	Invoice raised subsequent to change of rate	Date of receipt of payment
Services provided after the date of change of rate	4(b( (i)	Invoice raised prior to change of rate date	Amount received subsequent to change of rate date	Date of receipt of payment
	4(b( (ii)	Invoice raised prior to change of rate date	Amount received prior to change of rate date	Date of payment or issue of Invoice, whichever is earlier
	4(b( (iii)	Amount received prior to change of rate date	Invoice raised subsequent to change of rate date	Date of issue of Invoice
New services which are taxed for the first time	5(a)	Invoice raised prior to levy of new tax	Payment received Against such invoice prior to levy of new tax	No tax payable
	5(b)	Payment received Prior to date of  levy or new tax	Invoice issued within the period referred to in rule 4A of the Service Tax Rules, 1994 (i.e. within 14 days)	No tax payable
In case of continuous supply of services	6(1)	If date of periodic payment is specifically provided.		As per  specified date notified
	6(2)	Invoice raised or Payment received with respect to such service		Date of payment or issue of Invoice, whichever is earlier
Where associated enterprises are involved	7	Payment/ invoice/ debit- credit	Payment /invoice/ debit-credit.	Receipt of Payment or issue of Invoice (under rule 4A) or the date of debit or credit in books of accounts of the person liable to pay service tax, whichever is earlier.
Services relating to IPRs	8	Payment /invoice	Payment /invoice	Each receipt of Payment in respect of such use or the benefit, or issue of Invoice whichever is earlier.

 

(To be Continued )